Yup, Rockets Need Insurance, Too. But Way More Than the Feds Think

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Yup, Rockets Need Insurance, Too. But Way More Than the Feds Think

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Launching rockets is a risky business. So, in addition to those precious payloads, every mission carries an insurance policy juuust in case something goes awry. Private insurers handle most of it, but the federal government offers a backstop for those truly unusual catastrophes—think rocket nosediving into an elementary school—that would max out the private coverage.

And it turns out a Cape Canaveral cataclysm—or, if you prefer, a Wallops Island walloping, or a Vandenberg devastation—could cost that program far more than it expects. A report from the Government Accountability Office says the federal program undervalues its launch insurance and ought to update its estimates. Given that the entire space launch insurance industry bases its rates on those same estimates, any update could make even commercial updates more expensive.

First, a little history. In 1988, Congress recognized that private insurers lacked the resources to insure against a truly epic disaster and passed amendments to the Commercial Space Launch Act. The updated law required the Federal Aviation Administration to create a safety cushion of up to $1.5 billion—about $3.1 billion today, adjusted for inflation. "The federal insurance was put in place because there was a fear that the private companies wouldn't be able to take risk of launching and being insured and so it was a way of allowing the commercial market to develop," says Alicia Cackley, director of the GAO's financial markets and community investment team.

Space insurance isn't just a good idea, it's required. Every company launching a rocket must buy a policy—available through private insurers—based on calculations made by the FAA. These calculations depend on the type of rocket, the location of the launch site, and other variables. Do the math and you get something the insurance industry calls the maximum probable loss. The FAA caps it at $500 million.

Problem is, the program—and its estimates of maximum probable loss—need to get with the times. It still bases the cost of human casualties on 1988 values: $3 million per life. "We don't think that 1988 estimate is realistic anymore, just based on cost of living increase, if nothing else," says Cackley. The FAA also uses the casualty rate to set the value of property damage, so that, too, is undervalued. A truly horrific accident could leave the government paying out far more than expected.

Or not. The 1988 law does not guarantee that Congress will pay out the FAA's liability coverage—lawmakers would have to vote on it. "The companies all believe the federal government will stand by its commitment, and they operate as if that will happen," says Cackley. But if the cost vastly exceed FAA estimates, Congress could balk, leaving the launch company holding the bag.

Updating those figures, as the GAO recommends, poses other risks to the industry. "If the cost of the casualty number were to increase dramatically, that could reasonably increase the rate that private insurers have to charge," says Cackley. And that puts the FAA in a pickle, because it doesn't want to price private insurers out of the game. Nor does it want to put commercial launch companies out of business.

But representatives from insurance companies consider change in rates negligible, and in fact encourage the FAA to get with the re-estimating. "More accurate and less uncertain maximum probable loss calculations may allow more launch operators, more launch pads, and a more open launch environment, hence, increasing the number of space liability policies and the size of this market," says Denis Bensoussan, head of aviation for Beazley, an insurance company that covers space.

And the impact might not even be that bad. "I'd be surprised if insurance is 1 percent of the overall launch cost per flight," says Chris Kunstadter, senior vice president at XL Catlin, a large insurance company that covers spaceflight. And the overall risk to the government is actually quite low—it has never had to actually pay out for a catastrophic launch disaster.

The bigger threat to the industry, says Kunstadter, is the proliferation of small satellites. These need less insurance coverage, because they are cheaper to manufacture. They're also so light that many companies launching small satellite constellations put a dozen or so extras into orbit under the assumption that some will fail. "So maybe you don't need as much insurance, and that can have an effect on our market," he says. Space is risky, but not always in the ways you expect.

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